WHY CAR INSURANCE RATES ARE GOING UP

Is it that time of year again? Your car insurance policy is up for renewal and you are crossing your fingers hoping for a price reduction. Unless an accident or violation has come off, you are turning a more favorable age or have qualified for new discounts, a price reduction is unlikely. Even though you have been a safe driver, your insurance company may raise your rates. “Why are our rates going up?” is one of the most common question and insurance agent or customer service rep hears.

Unfortunately, the best answer is that it’s the cost of doing business. Insurance companies pay out billions of dollars in claims each year. When companies pay out more in claims and expenses than they generate in premiums that prompts insurance companies to raise their rates. This has become especially true in recent years.

More than 40,000 people died on the road last year — up 14 percent since 2014 — the sharpest increase in 53 years. In addition, distraction-related deaths were up almost 9 percent in 2015, according to data from the National Highway Traffic Safety Administration.

“We’re talking about a generation that was texting first, driving second,” Chris Mullen, Director of Technology research at State Farm, told NBC News. “When they get behind the wheel, if they’ve been watching you use the phone, if they would rather use the phone it’s gonna be hard to break that habit and get them driving safely from the get go.”

Are you facing a rate increase?

Contact Us today so we can make sure that you are still getting a great value on your insurance!

CAN INSURANCE COMPANIES RAISE THEIR RATES HOWEVER THEY WANT?

Insurance premiums are one of few prices that are controlled by the government. Insurance companies cannot implement a rate change without submitting an approval request to the State’s insurance commissioner first. If no valid argument can be made by the insurer that the rates need to be raised, the State will most likely deny the request.

Since 2012, the consumer price index (CPI) for auto insurance has gone up by 21.5%, compared with a rise in the overall consumer price index of 4.5% over that same five-year period.

Of the top 5 US insurers, only G.E.I.C.O. and Progressive have managed to maintain profits, but their margins are shrinking despite rate hikes. Other companies are doing far worse. In 2016, State Farm which is the single largest auto insurer in the country has seen a nearly $7,000,000,000 loss. That is despite having seen revenue from premiums rise by 26% since 2010 which was largely due to rate increases. The figure below paints a gloomy outlook for insurance premiums.

Insurance premiums profits and losses

In 2016, car insurance companies have lost about $7 for every $100 collected in premiums nationwide.

Cost of Claims

There are several factors that could be responsible for raising your car insurance rates.

Medical Costs

The cost of healthcare and health insurance has dominated many news cycles. Fact is, the trip to the emergency room or chiropractor might cost twice as much as it did just a few years ago. That cost is passed onto the insurance companies which in return pass it onto the consumers. Until healthcare costs become more stable and less people get hurt or even die in car accidents, premiums will continue to rise.

Litigation Costs and Fraud – An Example

Disclaimer: While the names and specific details in the scenario below are fictitious, these types of events happen more often than you might think.

You are standing at a red light that just turned green and you slowly start driving assuming the person in front of you pays attention but is busy looking at her phone. Before you know you bump into the car in front of you going less than 3 miles an hour. You do the right thing and pull over and check on each car and the other driver (let’s call her Lisa). Both cars only show some tiny scratches and the other driver says that she feels fine. You exchange your information and offer to pay for scratch out of pocket.

By the time Lisa gets done telling her roommate about the accident, she is convinced that she should go to urgent care because she might have gotten hurt. The stress alone causes Lisa’s muscles to tighten and sure enough, Lisa convinces the doctor that she has whiplash. Three prescriptions and 25 chiropractor’s appointments later, your car insurance company just received a bill for $350 to the damages of Lisa’s car and $4,600 for medical bills.

Lisa misses some work because of all her appointment and her co-worker Dan recommends Lisa contacting a personal injury attorney that he knows to make sure Lisa doesn’t get ripped off by the insurance company. Lisa meets with the law-firm and they “aim high” and ask for $20,000 in damages for Lisa’s pain and suffering. After some back and forth, the insurance company and law firm agree on $15,000. The lawyer gets $5,000 and after some bills are paid, Lisa gets $7,500.

At no point did the roommate, urgent care doctor, chiropractor, insurance company or attorney inspect the vehicle and make sure that the damages match the injuries. Why not? Because in the end, it probably doesn’t matter. If Lisa claims that she is hurt (and that she has never had a sore neck before) how can she be proven wrong?

When people cheat the claims process, it costs insurers a lot of money and that contributes to rate increases. The Insurance Information Institute estimates that insurance fraud in America costs $32 billion a year. If that number is divided by the number of drivers, each driver is paying about $160 per year just to pay for fraud alone. Add another $80 per driver for insureds lying on their insurance application.

Repair Cost

The increasing cost of labor is a major factor to the overall spike in repair costs. A study by CarMD.com claims the cost of vehicle repairs increased 10% in 2012 alone. Aside from increased labor costs, newer technology gets more expensive to repair (that bumper with 8 sensors might cost 3x as much to replace than the good-old basic bumper).

Uninsured Motorists

Uninsured motorist protection is not required by law in many states. It covers you in the event you’re involved in an accident with an uninsured driver. Across the United States it’s estimated that 12% of drivers are driving without car insurance.

The Insurance Research Council estimates that $2.6 billion in uninsured claims were paid out in 2012. The number of uninsured claims and the legal process it takes companies to secure settlements is huge. The IRC also estimates that uninsured claim payments are up 75% over the last 10 years and translated to a $14 increase per insured individual!